Student loans are a growing issue for individuals who've gone to college or are in college. Some people spend decades paying them off. Although there have been recent discussions about student loan relief, they are still unavoidable for many people. As far as student loans are concerned, most people go with traditional undergraduate federal loans; however, other options like Income-Share Agreements, or ISAs, exist.
While ISA providers advertise their ISAs as alternatives to traditional student loans, according to the Consumer Financial Protection Bureau (CFPB), ISAs are, in fact, loans. As a result, ISAs can be attractive to many people with student loan debt, especially those who have gone through undergraduate federal loans. If you consider an ISA, it's essential to compare it to other options, like private student loans, before deciding.
What is an ISA?
An ISA is a loan where the borrower agrees to pay back a percentage of their future income rather than a fixed amount. Because they get repaid based on a percentage of income, a borrower could end up paying back more or less than they would in a traditional loan. The lender would also receive more or less in return.
ISAs make particular sense for colleges to provide because they are already invested in your success and want you to succeed. They can be a win-win for colleges, even if some students do not earn a high-enough income. If enough of them do, they end up making more money back than a traditional loan.
How Do ISAs Work?
Income share agreements are currently unregulated, so each one is slightly different. But in general, you will start paying your loan once you graduate and begin to earn at a defined income level. Payments usually stop if you lose your job.
Because ISAs can vary from one to another, how much you will pay for an ISA is dependent on the specific ISA's terms. For example, the terms of an income share agreement usually depend on your college major and predicted salary. However, the following are standard terms that generally apply to an ISA:
- Income share percentage: This is how much of your total salary you'll pay back each month. College ISAs usually range between 2% and 10% of your salary. So, for example, if you are making $100,000 each year and agree to pay 6% of your salary back yearly, you will be expected to pay $6,000 in $500 payments each month.
- Salary floor: The salary floor is the minimum income you must reach before your payments are due. For example, your ISA's terms might list $60,000 as your salary floor, and you will not have to make any payments until you start earning that amount.
- Payment cap: The payment cap is the maximum you will have to repay under your agreement. That is typically the amount initially borrowed. For example, consider if you borrowed $70,000 and made $200,000 a year for seven years. If your payment cap is double the amount borrowed ($140,000), then by the seventh year (or whenever you reached $140,000), you would have paid off your ISA and be loan-free. Therefore, it is essential to check the payment cap on an ISA to make sure that the terms are fair and they will not be taking something like three times the amount you borrowed.
- Length of repayment: This is how long your income share agreement lasts. Repayment terms generally last up to 10 years but can be as little as two years.
Should I Use an ISA?
Now you may be wondering whether you should use an ISA. Lenders believe they are a great choice because ISAs are primarily unregulated. They can make back much more money than they would with traditional loans. But how do you know if they are in your best interest as a borrower? Well, there are clear advantages for the borrower too.
For example, you will not accrue interest, and there is a set repayment period. Plus, if your earnings are low, you will have an easier time with the ISA terms than you would with a traditional loan. However, if you do reach a high income, you may end up paying much more than you would with other loan options.
In the end, there is no clear-cut answer to whether ISAs are right or wrong for any one person. ISAs are dependent on the borrower's preferences and needs. If you need an alternative to traditional loans, an ISA could be the right fit for you. However, if you believe you'll be making a very high salary, then an ISA may cost you more in the long run. Finally, if you consider an ISA, look at the terms and compare them to your other options.